Management as a Liberal Art Research Institute

Peter Drucker on Innovation and Results

Michael Cortrite, Ph.D.

PUBLISHED:

March 22, 2024

Peter Drucker, throughout his long and distinguished career, advocated for the rights and well-being of all people. Drucker wanted all people to have respect, dignity, a meaningful place in society, and a degree of autonomy. Drucker also made sure to tell managers that even though caring for people is important, productivity and success are essential to the longevity of organizations (Murphy 2023).


According to Drucker successful entrepreneurs have a commitment to the successful practice of innovation and, in fact, innovation is the specific foundation of entrepreneurship. He believed that innovation is not so much about genius, but finding and taking advantage of opportunities for innovation (Drucker 2013 p.156).


Friesen uses the Drucker quote, “Stressing output is the key to increasing productivity while looking to increase activity can result in just the opposite.", to point out Drucker’s belief that successful organizations are innovative and productive.


Drucker defines entrepreneurship, not just in terms of small or start-up businesses, but as “any business that engages in innovation. Innovation is defined as “the effort to create purposeful, focused change in an enterprise’s economic or social potential.” (Drucker 2013 p.143). In other words, innovation is change to create better results.  One might say that Drucker thinks of innovation and entrepreneurship as synonymous. 


In his essay titled, The Discipline of Innovation (Drucker 2013), Drucker says that most successful innovations result from a conscious, purposeful search for innovation opportunities, Drucker lists seven areas of opportunity that exist within a company or industry. They are:



1.     Unexpected occurrences

2.     Incongruencies

3.     Process needs

4.     Industry and market changes

5.     Demographic changes

6.     Changes in perception

7.     New knowledge


An example of unexpected occurrences is when IBM developed the first modern accounting machine in the early 1930s. It was designed with banks in mind, but banks were not buying new equipment at the time. Fortunately, the New York Public Library bought one of the machines. This led to more than 100 machines being sold to other libraries. Instead of IBM losing money, they became even more successful. Drucker cites other examples of unexpected occurrences that led to successful innovations. Drucker suggests that organizations focus their monthly and quarterly reports as much on problems that arise as on potential opportunities because problems or mistakes can turn into profitable innovations. 


One of the examples Drucker recounts to show his second area of opportunity, incongruities, is the shipping industry using ocean freighters. Drucker explains that for the first part of the twentieth century shipbuilders and shipping companies kept trying to boost their sagging profits by looking at what turned out to be two incongruous ideas—either making ships faster or making them more fuel efficient. If they made ships faster, then fuel costs skyrocketed. If they made them more fuel efficient, it took too long for them to arrive at their destination. They finally realized that ships sitting idle in ports being loaded or unloaded by hand was a large waste of money. They started using roll-on roll-off containers that truckers and railroads had been using for 30 years. This innovation solved their money problem. 


Drucker’s third opportunity for innovation, process needs, is explained by using the example of what we call “the media.” Two innovations were used to create the innovation of the modern media. The first was the linotype, which made it possible to produce newspapers quickly and in large volume. The second was that newspaper publishers Adolph Ochs, Joseph Pulitzer, and William Randolph Hearst started selling advertising in their papers. These two innovations combined so that news could be widely distributed almost free of charge.


To explain Industry and market changes, Drucker points out that even though change is usually disliked, change happens and often things change overnight. And these changes can be opportunities for innovation. The brokerage firm Donaldson, Lufkin, and Jenrette (All Harvard graduates) was started in 1960. They discovered that things were changing in the financial industry—institutional investors were rapidly becoming dominant. They started the concept of negotiated commissions and quickly became one of Wall Street’s stellar performers.


Demographic Changes. The Japanese lead the world in robotics because they pay attention to demographics. Around 1970 everyone in the developed world knew that there was both a baby bust and an education explosion going on. About half of the young people were staying in school past high school. Consequently, the number of people available for blue-collar work in manufacturing was bound to decrease and become inadequate by 1990. The Japanese were ready with the answer to this problem. It was robotics and Japan had a large head start on the rest of the world in this area.


Drucker uses the examples of “The glass is half full” and “The glass is half empty” to introduce changes in perceptions since these two similar statements have vastly different meanings. Drucker points out that Americans’ health has never been better. But for some reason, Americans seem to be suddenly obsessed with it. They want healthcare magazines, health foods, home exercise equipment, and gym memberships. And even though the crime rate is the lowest it has been in 40 years; Americans are buying up the latest alarms and home surveillance systems. And entrepreneurs are taking advantage of, not facts, but perceptions that crime is a problem.


New knowledge innovation is what people generally think of as innovation. It’s big, useful, and important stuff, but Drucker says there is a protracted span (somewhere around 50 years) between emerging new knowledge and when it becomes usable technology. For example, some of the knowledge that was ultimately used to create modern banking goes back to the era of Napoleon. The same can be said of the innovation of computers. For example, the precursor of the modern computer, the punch card, was invented in 1890.


Conclusion

 

Peter Drucker has often been described as “prescient” and “decades ahead of his time.” (Ambachtsheer 2005). Drucker’s work on innovation, management by objectives, entrepreneurship, and results is another example of Drucker’s work staying relevant and of his ability to foresee the future. A new leadership model, Objectives and Key Results (OKR) is described by Keryn Gold in the July 2023 issue of Leadership Excellence. This model was created by Andy Grove of Intel and has been adopted by organizations including Netflix, Amazon, Facebook, Adobe, and Linkedin.  It links, among other things, clarity, innovation, empowerment, and employee engagement to success (Gold 2023).


In the book Measure What Matters, John Doerr writes about “MBOs,” or Management by Objectives. MBOs were the brainchild of Peter Drucker and provided Andy Grove a basis for his eventual theory of OKRs. In fact, Grove’s name for them originally was “iMBOs,” for Intel Management by Objectives (Doerr 2018). 


References:


Ambachtsheer, Keith. The Unseen Revolution. Pensions and Investments Vol. 33 Iss. 24 p.12

 2005


Doerr, John. Measure What Matters: How Google, Bono, and The Gates Foundation Rock 

The world with OKRs 2018


Drucker, Peter. The Discipline of Innovation Chapter in On Innovation, Harvard Business Review 

2013


Friesen, Wes. Measure What Matters Business Credit, Volume 125 Issue 8 (Sept. 2023)


Gold, Keryn. OKR Best Practices That Promote a Culture of Empowerment and Innovation

 Leadership Excellence. Vol. 40, Issue 7 July 2023


Murphy, Glenn. Delivering on Drucker’s Call to Action. Strategic Finance, Volume 104, Issue 7

            Jan. 2023

The Future of Knowledge Work: What Drucker can teach us

By Karen Linkletter Ph.D. • November 19, 2024
Interview with Karen Linkletter at the 16th Global Peter Drucker Forum 2024  Video Interview

The Specifics of Management of the Knowledge Worker

By Ryan Lee • November 7, 2024
Nowhere is management theory demanded more than in managing the knowledge worker, and yet nowhere is management theory more inadequate in addressing a field’s issues than in knowledge work. This is the point Peter Drucker posited in his work Management Challenges for the 21st Century (1991), and to resolve it he came up with six factors that determine the productivity of the management worker. Among these, his final point that management workers “must be treated as an ‘asset’ rather than a ‘cost’” by any given organization is an important concept1. While it only gradually emerged within management theory over the century, it is crucial for any employer and any government to understand and apply if they are to retain a competitive advantage going into the future. Historically, management theory has been about improving the output of the worker through banal efficiency: how to increase the production of steel per head, how to increase the production of cars per hour, how to minimize deficient products, etc. In all these considerations, the worker is a disposable resource. When he is hired, he is set to a particular task that is typically repetitive and thus easily taught, and when he is not needed because of shortcomings in his work, company difficulties, or automation, he is laid off. Referred to as “dumb oxen”, workers were seen in management theory as machines to have productivity squeezed out of. The shift from a majority manufacturing to service-based economy during the first half of the twentieth century changed this dynamic to some extent. The American postwar economic boom introduced the office worker as a common source of employment. This trend continued throughout the conglomerate era of the 1960s and was helped by the decline of the American manufacturing industry in the 1970s. Now in a stage dominated by service and knowledge work, the American economy must approach management differently. The aforementioned cost-asset shift is a demonstration of why this is so, as Drucker’s emphasis on the knowledge worker’s autonomy means that they wield control, not only within their job but over who they should work for as well. This in addition to the high-capital nature of knowledge workers means that the old management theory approach to labor as disposable will backfire catastrophically for any company that tries it with their knowledge workers. It is also important to remember the demographic trends of the United States, and more so the world, in considering why the cost-asset shift is vital. For all of human history until some fifty years ago, population was considered to be in tandem with economic power, given larger populations yielded larger labor forces and consumer markets. Economic growth was thus also correlated with population growth, demonstrated by the historic development of Europe and the United States and the more recent examples of the developing world. Consequently, the worldwide decline in fertility rates, and the decline in population numbers in some developed countries, signals economic decline for the future. In the labor market, smaller populations mean fewer jobs that produce for and service fewer people. Although the knowledge worker has grown in proportion to the total labor market, these demographic declines will affect knowledge workers as well, meaning employers will have a vested interest in retaining their high-capital labor. To enforce this, the cost-asset shift will have to come into play. The wants and needs of the knowledge worker pose a unique challenge in the field of management. Autonomy, for the first time, can be regarded as a significant factor affecting all other aspects of this labor base. What good does a large salary provide a knowledge worker if they don’t feel that they are welcome at an institution? How would they perceive that their work is not being directed towards productive pursuits at their corporation, especially given the brain work and dedication given to it? Of course, the fruits of one’s labor has been a contentious issue in management ever since compensation and workers’ rights became a universal constant with the Industrial Revolution, but this is augmented by the knowledge worker’s particular method of generating value. Given that Drucker poses their largest asset and source of value as their own mind, they will intrinsically have a special attachment to their work almost as their brainchild. Incentivizing the knowledge worker is also only one part of this picture. Per Drucker, the knowledge worker’s labor does not follow the linear relationship between quantity invested and returned. The elaborate nature of knowledge work makes it heavily dependent upon synergy: the right combination of talent can grow an organization by leaps and bounds, while virtually incompatible teams or partnerships can render all potential talent useless. And the human capital cost of the knowledge worker, both in their parents and the state educating them and in cost to their employers, is astronomical compared to all previous kinds of labor. In conclusion, the needs and wants of the knowledge worker must be met adequately, especially in the field of management. Management must almost undergo a revolution to adapt to this novel challenge, for the knowledge worker is the future of economic productivity in the developed world. Those employers that successfully accommodate the demands of this class of talent will eventually reign over those that do not accept that this is the direction economic productivity is headed.  References Drucker, P. F. (1991) Management Challenges for the 21st Century. Harper Business.

The Wisdom and Continuing Relevance of Peter Drucker

By Michael Cortrite Ph.D. • November 7, 2024
What is wisdom? The dictionary says it is knowledge of what is true and right coupled with just judgment as to action. Jennifer Rowley reports that it is the “ability to act critically or practically in a given situation. It is based on ethical judgment related to an individual's belief system.” (Rowley 2006 p. 255). So, wisdom seems to be about deciding on or doing an action based on moral or ethical belief in helping other people. This clearly describes Peter Drucker and his often prescient ideas For the 100 th anniversary of Peter Drucker’s birth, Harvard Business Review dedicated its November 2009 magazine to Drucker. In one of the articles about Drucker by Rosabeth Moss Kanter (2009 p. 1), What Would Peter Say? Kanter posits that, Heeding Peter Drucker's wisdom might have helped us avoid—and will help us solve numerous challenges, from restoring trust in business to tackling climate change. He issued early warnings about excessive executive pay, the auto industry’s failure to adapt and innovate, competitive threats from emerging markets, and the perils of neglecting nonprofit organizations and other agents of societal reform. Meynhardt (2010) calls Drucker a towering figure in Twentieth Century management. He says no other writer has had such an impact. He is well-known to practitioners and scholars for his practical wisdom and common sense approach to management as a liberal art. Drucker believed that there is no how-to solution for management practice and education. Doing more of “this” and less of “that” and vice versa is not how Drucker suggests managers do their work. Rather, Drucker relies more on morality and the virtue of practical wisdom to solve problems related to organizations. The virtue that Drucker talks about cannot be taught. It must be experienced and self-developed over time. A good example of this is Drucker’s Management by Objectives (MBO). Drucker does not give technical advice on how to initiate MBO. Rather he wisdomizes his moral convictions that integrating personal needs for autonomy with the quest of submitting one’s efforts to a higher principle (helping people) ensures performance by converting objective needs into personal goals. (Meynhardt, 2010). Peter Drucker published thirty-eight articles in the Harvard Business Review (HBR) and seven times won the McKinsey Award presented annually to the author of the best article published during the previous year in HBR. No other person has won as many McKinsey awards as Drucker The former editor-in-chief of Harvard Business Review, Thomas A. Stewart, quotes Peter Drucker; “The few of us who talked of management forty years ago were considered more or less deranged.” Stewart says that this was essentially correct. Harvard Business Review's very mission is to improve management practice. Stewart says this mission is inconceivable without Drucker’s work. Drucker’s work in management planted ideas that are as fruitful today as they ever were. Stewart posits that each year, managers discover extraordinary and immediate relevance in articles and books that were written before they were born or even before their parents were born. Stewart (2016) tries to answer the questions: Why does Drucker’s work endure? and Why is Drucker still relevant? First, was Drucker’s talent for asking the right questions. He had an instinct for being able to not let the urgent drive out the important, for seeing the trees, not just the forest. This allowed him to calmly ask pertinent questions that encouraged clients to find the proper course to take. Secondly, Drucker was able to see whole organizations. Instead of focusing on small particular problems. Ducker had the ability to find the overarching problem as well. Stewart uses Drucker’s 1994 HBR article, The Theory of the Business to make this point. Many people were trying to analyze the problems of IBM and General Motors by looking for root causes and trying to fix the blame. Drucker, on the other hand, argued correctly that the theories and assumptions on which they had managed successfully for many years were outdated. This article is as relevant today as it was in 1994 because Drucker took the “big picture view.” And no one else has ever been so skillful at describing it. Thirdly, starting in 1934, Drucker spent two years at General Motors with the legendary Alfred P. Sloan, immersed in the workings of the automaker and learning the business from within. This allowed him to talk with authority, but he has always stayed “street smart and wise.” This mentoring helped give Drucker the gift of being able to reason inductively and deductively. He could infer a new principle or a theory from a set of data or being confronted with a particular problem; he could find the right principle to apply to solve it. Drucker’s first article published in HBR, Management Must Manage, challenged managers to learn their profession not in terms of prerogatives but in terms of their responsibilities, to assume the burden of leadership rather than the mantle of privilege. Many in the management/leadership field probably found Drucker to be “deranged,” but in 2024, this is important advice for leader (Stewart 2006). Just a few more of Drucker’s ideas that seemed well outside the mainstream when he proposed them but are standard practice today include: Managing Oneself, Privatization, Decentralization, Knowledge Workers, Management by Objectives, Charismatic Leadership Being Overrated, CEO Outsize Pay Packages, and Enthusiasm of the Work of the Salvation Army (Rees, 2014). Clearly, Drucker remains relevant! References: Kanter, R. 2009. What would Peter say? Harvard Business Review. November, 2009. Meynhardt, T. 2010. The practical wisdom of Peter Drucker: Roots in the Christian tradition. Journal of Management Development Vol. 29. No. 7/8. Rees, M. 2014 The wisdom of Peter Drucker. Wall Street Journal. Dec. 12, 2014. Rowley, J. 2006. Where is the knowledge that we have lost in knowledge? Journal of Documentation. Vol. 62, Iss. 2. 251-270. Stewart, T. 2006. Classic Drucker. Editor Thomas A. Stewart. Harvard Business School Publishing Corporation.
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